West Michigan exports grow and so does VAT
Twenty years ago, when Jerry Jonckheere was working on his master’s of science degree in taxation, he wrote a thesis predicting that the United States would have a value-added tax by the year 2000.
“I was wrong,” said Jonckheere, now a partner at Plante Moran in Grand Rapids and an expert on business taxation.
Actually, he was not completely wrong: An increasing number of West Michigan companies are having to ante up for the VAT when exporting goods and materials to other countries, particularly Canada and Mexico.
Jonckheere and Scott Sneckenberg, another Plante Moran partner, will lead a seminar Thursday on the VAT at the Van Andel Global Trade Center at GVSU.
Consumers and businesses in many countries around the world — with the notable exception of the U.S. — are familiar with the VAT. In general, it is a national sales tax on goods paid at all levels of consumption, from the original sale of the raw material through the purchase of the end product by the consumer.
“Most Americans have no clue (about the VAT) other than when they are on vacation” in a foreign country, said Jonckheere. “They just get hit with it, and their response is: ‘What the heck is this?’”
The U.S. has never had a national VAT, and in April, representatives of both major political parties in the U.S. Congress came out in opposition to any VAT proposals. But Jonckheere said an increasing number of exporting companies that Plante Moran serves in West Michigan are experiencing a VAT and want to know more about it.
“The key thing we are seeing is, a lot more middle market companies are actually exporting,” said Jonckheere. “It used to be, say 20 years ago, that only the big companies exported, but now we’re seeing companies with $3 million in sales exporting.”
“I would say it is a lot more unusual now to see a company with $50 million in sales that isn’t exporting to Mexico or Canada,” added Jonckheere.
He said an American company that becomes an importer of record and ships to Canada will be paying the VAT on each shipment, “and they may not even know it because it is included in the billing from the broker.”
“They may wonder why the broker charges so much,” added Jonckheere.
At the seminar on Thursday, Jonckheere will focus on the Canadian VAT, which the Canadian government calls a Goods and Services Tax, or GST. Sneckenberg will focus on the value-added tax in Mexico, which is designated IVA, pronounced “eva.”
Canada has had a VAT since 1991, Mexico since 1965. In Canada, the VAT has been going down lately, and is currently at 5 percent. However, there is an additional Canadian tax called an HST that makes the total VAT in some provinces as much as 12 percent.
In Mexico, the VAT was recently increased and now is at 16 percent; it had been 15.
Mexico has a tax program for Mexican manufacturers that import from the U.S. and then export the resulting production; the VAT is waived, in those cases. It is important for U.S. companies with subsidiaries in Mexico to understand those rules, said Jonckheere.
In general, the full burden of the VAT ultimately falls on consumers. In business-to-business transactions, a company in a country with a VAT pays the tax on goods and materials that it purchases, then charges VAT on goods that it sells. The company then pays the government the difference between the tax it paid to suppliers and what it later collected from customers.
Jonckheere gave the example of a smelter that buys $1,000 worth of ore, paying a $150 VAT on it if the rate is 15 percent. The smelter then sells the processed ore as goods now worth $2,000, and collects a total VAT of $300. But before forwarding that $300 tax to the government, the smelter can deduct the $150 it originally paid.
Taxes are paid to the government at each step of the manufacturing process. Ultimately, the end user pays the full VAT on the finished product. If it is a $10,000 car and the VAT is 15 percent, that’s $1,500 going directly to the government.
“What governments like about this is, they get the money sooner than a true sales tax” that is only charged to the consumer, said Jonckheere.
“Americans don’t realize how unique our tax system is, compared to the rest of the world,” said Jonckheere. “Right now, we have very high corporate (tax) rates compared to the rest of the world, but we have very low individual tax rates, compared to the rest of the world.”
“We have no value-added tax,” he noted. “What makes it very interesting is, we’re the only country that doesn’t have it.”
Jonckheere said there is an old joke among American accountants that explains why the U.S. does not have a VAT.
“The Republicans don’t like the VAT because it can raise a lot of money real quick, and the Democrats hate the VAT because it’s a regressive tax, a tax more on poor people as a percentage of income, than on rich people.”
“But as soon as the Democrats figure out it can raise a lot of money, and as soon as the Republicans figure out it’s a regressive tax, then we’ll get the VAT,” joked Jonckheere.
The VAT seminar Thursday runs from 8 to 11:30 a.m. at the GVSU meeting space in the Bicycle Factory, 201 Front St. SW. Advance registration is required by calling (616) 331-6811.